Transcorp Notches BBB+ Rating on Better Patronage, Access to Funding
Transcorp Hotels Plc notches an investment grade ratings of BBB+ on earnings expectation, access to funding supports and better patronage, solid margin amidst concern that the hotelier leverage position has become relatively high, according to a rating note.
In its recent rating on the company, GCR Ratings affirmed Transcorp Hotels Plc.’s national scale long-term and short-term Issuer ratings of BBB+ (NG) and A2 (NG) respectively, with the outlook accorded as stable.
The emerging market focused firm said the ratings of Transcorp Hotels balance its concentration to a single hotel property against strong parental support.
However, its leverage position remains relatively high, with weak cash flow coverage of debt, according to the rating note which added that the Hotel Group has evidenced a strong earnings performance as COVID-19 disruptions have eased.
“Transcorp’s competitive position is a neutral rating factor, primarily due to its concentration on a single hotel property, which accounts for 96% of earnings, the Abuja Hilton”, GCR rating said.
The report reads notwithstanding, GCR has taken cognisance of the hotel’s leading position in the Nigerian hospitality sector, with strong patronage by the premium economic, business, and political class.
“As such, Transcorp’s flagship property in Abuja has consistently reported higher occupancy rates and average daily rates above peers”.
The ratings explained that to complement its physical operations, the group formed Aura by Transcorp Hotels to provide a platform for listing other hospitality offerings.
The platform has gained traction since its inception in the third quarter (3Q) of the financial year 2021, with 66 hotels, 509 apartments and 66 restaurants listed as of September, but GCR expects its earnings contribution to remain modest over the review period.
Transcorp earnings performance is positive to the ratings, underpinned by the rebound of the top line to the pre-COVID highs, according to the rating note.
After witnessing a revenue plunge of 50% in 2020, attributable to the impact of the pandemic, management accounts as of September 2021 shows an annualised 91.8% growth to N14.6 billion (9M FY20: N6.8bn; 9M FY19: N14.7bn) on the back of a recovery in occupancy rates.
GCR anticipates that the full year 2021 revenue will likely register at a 2019 high of N20 billion on the back of the seasonally strong bookings in the final quarter of the year, whilst modest growth over the medium term will be supported by annual price escalations and sustained business volume, barring further pandemic shocks.
The firm said the earnings before interest tax, depreciation and amortisation (EBITDA) margin has returned to a pre-pandemic level of 33.3% during 9-month of the financial year 2021 from a review low of 9.6% in 2020.
This is expected to sufficiently cover operating requirements and result in modest net profit in 2021 from net loss recorded last year, before returning to robust profitability from 2022, according to the rating note.
However, the GCR Ratings noted that the leverage and capital structure constitutes key rating constraints, reflecting the weak debt service metrics.
Specifically, operating cash flow coverage of debt has been weak/volatile over the review period, trending at an average of 13.8% from 17.8% in 2020 on the back of the high debt level.
This registered negative in the 9-month financial year 2021 as a result of the unwinding of large creditors’ balance. Similarly, interest coverage has trended at a review average of 1x, given the high finance costs.
GCR expects that the operating cash flow coverage of debt and interest coverage will improve to the intermediate range of 20%-28% and 2x-4.7x respectively over the medium term, underpinned by moderation in debt and sound earnings generation.
While the weak earnings resulted in a deterioration in net debt to EBITDA to nearly 20x in 2020, this improved to a modest 3.1x at 9-month 2021 and expected to moderate to 2.6x at 2021 and further below 2x over the next two years.
Notwithstanding, GCR said the weak leverage metrics are counterbalanced by Transcorp’s proactive reprofiling of the debt book in 2020.
It did through N10 billion in rights issue to support debt repayment of N11.4 billion and a concessional loan of N10 billion from the Bank of Industry utilised for extending the maturity of the debt profile to 2026.
The ratings also considered liquidity as moderate, with GCR’s estimated sources versus uses of funds of 1.5x over the next 12 months.
“This is underpinned by the expected robust operating cash flows of about N4 billion for 2022 and cash holding of N4.5 billion at September 2021, compared to short term debt redemption of N3.9 billion at 9-month 2021 and relatively low capital expenditure commitment of N1.8 billion”.
The access to diverse sources of funding also provides some comfort, GCR Rating added in the report.
The emerging market rating firm factored in strong parental support from Transnational Corporation of Nigeria Plc, given the strong operational integration of the Hotel Group, the good history of funding support and its relative importance to the wider group, accounting for 33% of the asset base and 58% of equity.
It said the stable outlook reflects GCR’s expectation that Transcorp will sustain robust earnings and cash generation over the outlook period, barring any further severe COVID restrictions on business activity.
N10bn Bond Affirmed BBB+
In a related development, GCR affirmed the national scale long term issue rating of BBB+ (NG) assigned to Transcorp Hotels Plc.’s N10 billion Series 1 Senior Unsecured Bonds, with the outlook also accorded as stable.
The N10bn Series 1 Senior Unsecured Bond rating reflects the long-term rating of the Issuer, namely Transcorp Hotels Plc, it added. The rating note explained that the Series 1 Bonds are direct, unconditional, senior, unsubordinated, and unsecured obligations of the Issuer and rank pari passu without any preference among themselves.
The Bonds also rank pari passu with all other senior unsecured and unsubordinated obligations assumed by the Issuer other than those mandatorily preferred by law, according to GCR.
It said given that Transcorp Hotels Plc offers timely and full coverage of all payments due to the Bondholders, under the N10 billion Series 1 Senior Unsecured Bonds, the Bond bears the same default risk as its Issuer and would reflect similar recovery prospects to senior unsecured creditors in the event of a default.
As such, the long-term Issue rating for the Series 1 Bonds is equivalent to the Issuer’s long term senior unsecured rating, the report added.
GCR said it has reviewed the Trustee’s performance report from United Capital Trustees Limited, dated 26 November 2021, and notes that twelve coupon payments and ten principal repayments totalling N14.9 billion have been made to date.
The Trustee reports confirmed that there is no breach of negative pledge or covenants from the Issuer as of the report date, GCR stated. The Bonds were issued in October 2015, with a coupon rate of 16% and a maturity date in October 2022.
In addition, it added that the stable outlook reflects GCR’s expectation that Transcorp will sustain robust earnings and cash generation over the outlook period, barring any further severe COVID restrictions on business activity.
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